What is Market Depth?

Understanding Market Depth

Market depth measures the volume of buy and sell orders available at each price level. Deep markets absorb large trades with minimal price impact; shallow markets move quickly when big orders hit.

Assessing Depth

Depth tools show cumulative volume above and below the current price. Combine them with order book data, time-of-day analysis, and knowledge of upcoming events to anticipate liquidity changes.

Strategic Applications

Use depth cues to decide between market vs. limit orders, set realistic targets, or anticipate slippage. When depth collapses, reduce leverage and consider staying flat.

Depth Imbalance

Track cumulative depth above vs. below price. Persistent imbalances (e.g., offers outweighing bids 2:1) can foreshadow drift in that direction, especially when confirmed by rising tick volume and order‑book shifts.

Practical Use

• Downsize orders during thin periods; break larger trades into clips.
• Place stops beyond obvious thin pockets to reduce stop‑outs.
• Manage expectations—set targets where depth thins to improve fill odds.

Sizing example: if visible depth supports roughly 1M notional within 1 pip and you plan a 3M order, expect partial fills and slippage unless you stage clips or wait for thicker periods. Adjust risk so worst‑case impact still fits your plan.

Combine depth with order flow proxies. When depth thins above and aggression shifts to the bid, the path of least resistance often points lower. Use this context to choose order type and size.

Risk note: depth can vanish in milliseconds during regime shifts. Always size trades assuming worse outcomes than the screen suggests and use hard stops to protect against air pockets.